Interview with Abid Butt, CEO, e2e Supply Chain Management: 'China will take away the big logistics business under CPEC'

Abid Butt is the founder and CEO of e2e Supply Chain Management - a logistic company operating in Pakistan, Singapore, Malaysia and Afghanistan since 2006. He is also the founder and CEO of e2e Business Enterprise, a first of its kind manufacturing plant that produces rice bran oil from indigenous sources; he is also the co-founder and member of the board of Pakistan Terminal Operator and Tripkar.com. A first-generation entrepreneur, Abid has also founded and sold successful firms in trucking, agriculture and human resource sectors in the past.
Before engaging in his own entrepreneurial initiatives, he was employed by GEODIS (France's largest logistics company) responsible for international business development based out of Paris, and Maersk Line as Area Manager Far East and Middle East based in Singapore. He holds a BSc Economics from LUMS; MSc in Financial Management from SOAS, and an MBA from INSEAD. In 2015 the World Economic Forum chose Abid as a Young Global Leader.
BR Research had an opportunity to sit with Abid to discuss some of the challenges in Pakistan's logistics sector, what the CPEC holds for the future of logistics industry in Pakistan and his company, and which sectors will be most interesting to explore given demand prospects.
BR Research: Yours is a logistics firm, which gives you an insight into the trucking sector. Just how informal is the trucking sector in Pakistan?
Abid Butt: Let me just give you a very short example. There are 240,000 trucks registered in Pakistan, and there are 171,000 players, which mean there are 1.4 trucks per owner. I think that pretty much sums it up all. Most trucks are driver owned, although some are contracted out to companies.
BRR: What are some of biggest on-ground problems faced by Pakistan's trucking industry?
AB: One of the main problems is that the roads in and around the industrial areas in Pakistan are terrible; truck drivers are not able to enter these areas. Pakistan runs on the tax revenue from those industries, but when you go there you find out they don't have roads. And this is a country-wide problem.
Second issue is the taxation. It used to be 2 percent but recently 13 percent GST has been imposed by provincial governments on which there is lack of clarity whether it is to be paid in the province of origin or destination.
BRR: How much does a transporter earn?
AB: A 15-ton vehicle earns about Rs 110,000 in a return trip; Rs 80,000 going up and the rest coming back because there are more trucks available on the down trip. It is a bit complicated, but I am just simplifying it for you, because sometimes the cargo has to be delivered to Rahim Yar Khan and then from there it goes empty to Karachi. Anyway, the net earning on that trip for a trucker is about Rs 20,000.
Now consider that it takes around eight days for one round trip. If you take 4-5 trips a month, you can earn around Rs 80,000-Rs 100,000 a month. This is net of fuel cost and other, but not depreciation because informal players don't include depreciation and insurance.
BRR: Why don't truckers formalize and get better pricing through delivering better quality?
AB: Why don't medical stores form companies? Informality is altogether another problem, which is across all sectors of the economy.
For a lot of people, truck earnings are like pension. Truckers have been working on a sharing model long before the likes of Uber came along. In our market, there are people who have shares in a truck. The owners have their name on it, but the driver has a share in it. This way they can incentivise them to ensure they don't run away. In many cases, a transporter approaches a retired government officer and offers him to purchase a truck together. There are one or two people in this industry who have a fleet of 1500 trucks, but when you look into it there might be a 100 people behind those 1500 trucks.
BRR: Those who follow the industry argue that most of our trucking fleet is outdated and load per axle aren't followed as per standard. These and other problems, they say, will limit us from making use of the TIR. What's your take on the subject?
AB: In theory yes, only in theory. In reality it's another thing. Tell me, why would a new truck ever go to Afghanistan? Why would a trucker take such a high risk? Trucks cost at least Rs 10 million and 95 percent if not, 99 percent of this industry doesn't use insurance. This is why a transport ministry is needed to make insurance compulsory. But the real cost isn't the damage; it's the downtime. The driver isn't earning when the truck is down.
Then people get excited about China. Fine it's good for Pakistan. But in reality Khunjerab-Abottabad route is barely enough to allow one truck in one lane at one point. And there are only two lanes, one for going up and one going down. They say there will be 1000 trucks passing per day, but how will that work. There is just not enough supporting infrastructure.
When we were doing Pak-Afghan trade as well as transit trade, Pakistani trucks were used, because there was more cargo going from this way, than cargo coming to Pakistan. Pakistan's exports were higher to Afghanistan than its imports. Likewise, Afghanistan's imports from the world are higher than its exports, which is why; transit business from Pakistan to Afghanistan is higher than from Afghanistan to Pakistan. That is why trucking decisions are made in Karachi and not in Kabul.
Now look at CPEC from the same lens. Where will the trucking decision be made, Karachi or Gwadar or Xinxiang or wherever in China, naturally China. Or in the case of projects in Pakistan, which are being implemented by Chinese contractors, they will give logistics business to the Chinese state and non-state-owned companies. Pakistani players will get a very small part of the pie. We might get the know-how, the knowledge spill-over. But my concern is that Pakistan's trucking business will not get a big chunk of the business; the big business in trucking will be taken by the Chinese. Pakistanis would only get the leftovers.
BRR: How does the world's biggest logistics firm operate?
AB: The world's largest logistics companies are mostly European and what they do defines logistics. What are big logistics companies doing globally? They don't own assets. It's called a light asset model. They always outsource their assets, because the question is: do you want to run trucks or do you want to serve the customer? Sometimes there are conflicting answers to both. Then you start going away from logistics. Driving a truck isn't logistics. I am surprised that Pakistan is a country of 200 million plus people, yet no global logistics companies has emerged from here even though the growth model doesn't require owning big assets.
BRR: Tell us about your company.
AB: I was working for France's largest logistics company in Paris. When I went to Eastern Europe, I saw that a lot of local logistics companies were beating global logistics companies. I felt that they were 10 years ahead of Pakistan. I thought if someone goes into Pakistan now, they will be beating these companies in 10 years. And we did it.
We started this company in 2006; our revenues peaked in 2011, when we were fully involved in the Nato cargo business. During this period, we built a trucking company because we weren't getting the quality of trucking services we needed. But we sold that business last year. Our firm is a pioneer in Pakistan that has managed end to end logistics, and presented all the services to the customer. Most companies you find are single truck owners, or in the case of customs, brokers offering clearance through a single room office, where they've been serving three customers for the last 25 years.
As a result of our efforts, our company e2e Supply Chain Management was ranked the fastest growing company in Pakistan of all private companies; it was ranked fastest growing in 2011, second fastest in 2012, and fourth in 2010. This was by an All World Network, which is a Harvard-based organisation. We were brand of the year for three years in a row, so it is possible to beat these foreign companies. I now want it to make it a regional company if not a global one.
BRR: What are some of the obstacles in end to end logistics?
AB: One of the key problems is that most companies do not understand the importance of having end to end logistics; they want to cut costs. Even some of the big firms do not give end to end business. Hardly 3 percent of the companies in Pakistan understand the benefits of one-window and give end to end business.
BRR: Where do you see your major growth coming from in the next few years?
AB: I think there are a couple of areas that are going to be interesting. CPEC is there but there's a big problem with CPEC that we have already discussed. Linked to CPEC, I find logistics in power projects is huge. Let's say, if there are power projects of $45 billion, easily 7 percent of that will be spent on logistics. Third, I find agriculture logistics very exciting. Forty percent of farm produce gets wasted between farm and market, which is not an acceptable number at all.
BRR: But then since you operate in the end-to-end space, you're not in the owner model, so you will face warehousing problems in agriculture logistics?
AB: Globally, logistics companies don't own warehouses. It's about outsourcing. But I tell you cold storage warehousing is only half the problem. The real problem starts at the time and place of harvesting. Farm products needs to be put in a cold chain at the farms right after they are harvested. Cold storage chain, therefore, has to start from the farm or hubs near the farms, and the trucks and the warehouses.
BRR: Where is the cold storage most difficult to implement? At truck level, big warehouse level or at the farm level.
AB: A refrigerated truck is easy to put in place. It's difficult at the farm level. At the individual level, it's already happening, but not at the national level. It needs to be implemented across the board through public private partnership.
BRR: Can you share ballpark average industry estimates of gross margins for various businesses within the logistics industry?
AB: I can tell you general percentages. For air freight, the gross margin is generally 3 to 5 percent; sea freight is 5-8 percent; trucking is 8-12 percent; warehousing is 20-25 percent, and for customs clearance, it is about 12-15 percent.
BRR: What's the average ROI in Pakistan's logistics industry?
AB: I think the ROI should be 30 to 40 percent at a scale.
BRR: Why don't logistics firms enter the stock market? Do they not have capital financing needs?
AB: I might be there soon. We want to list for sure. The central point of future logistics is going to be asset-sharing that you're seeing; the Uber of logistics. Everything online, what's happening to banking is going to happen to logistics. It's going to be all online, it's going be a shared model.
BRR: What do you think is the size of logistics industry in Pakistan?
AB: Its 20 billion dollars; about 5 percent of Pakistan's GDP.
BRR: What's your strategy to swim in the CPEC tide because to you that tide seems to be exclusive for Chinese logistics?
AB: There are two ways to go about it. One is to do partnership or represent a Chinese firm in Pakistan. The other strategy can be entering into JVs or Pakistani companies outright buying Chinese companies.
We are interested in the latter, and accordingly we're looking at acquisition targets.